Several committee members were shocked that the administration only recently discovered the $50 million surplus in the general fund and the $70 million surplus in a state program for low-income students after putting together the 1994-'95 budget proposal.

Committee members were especially outraged that so much money failed to reach the students who need it the most.

"To see this much money appropriated and not used is wrong," said budget committee member Stephen R. Ballis. "Why are we finding out about it now, instead of throughout the year? . . . This should not be allowed to happen again."

The $70 million surplus was created when individual schools reported that they wanted to save portions of this year's Chapter 1 state funds for low-income students, according to school officials. The schools wanted to add the remainder of the funds to the next year's budget to purchase big-ticket items such as computer labs and instructional materials, said Charley Gillispie, school chief financial officer.

Johnson also said that many new principals hired this year may not have been aware they had the money.

The budget committee and Board of Education in separate actions directed Johnson to investigate why many schools were carrying over their Chapter 1 money. They also urged her to devise guidelines to ensure that the money from now on would be spent, not saved.

Johnson, who also blamed the problem on an outdated computer system, said she has already hired someone who is looking into the situation and monitoring the schools where large amounts of Chapter 1 money was carried over.

How the Chapter 1 money is spent will be left up to the individual schools; the school board can only oversee the process.

The controversy Monday over the discovered funds could be an indication of what is ahead for the budget process. The budget committee on Monday approved the Chapter 1 budget, but forwarded the rest of the spending plan to the school board.

The administration's $2.9 billion proposal is about $1 million more than the 1993-'94 budget. The school board scheduled hearings for July 18 and 20 to allow the public to comment on it.

In a typical year, the school board faces a deficit even though the General Assembly requires that Chicago Public Schools have a balanced budget. It is this legislative requirement that complicates the budget process.

Last year, the legislature approved a two-year $378 million bailout plan, after a deficit delayed the opening of schools. When that funding ends, the school system is expecting what could be an even higher shortfall in 1995.

The impending budget crunch sparked debate on what to do with the $50 million surplus, which administrators attribute to the early retirement of more than 1,500 administrators and teachers during the 1993-'94 school year.

Gillispie said that the board should save at least $20 million of that surplus to help fill the 1995 deficit.

He said he wanted to hold onto some of the surplus because he was concerned that $15 million in Medicaid money for the current fiscal year had not been reimbursed by the federal government.

The school system is expected to be repaid for providing medical and counseling services to students in the federal health-care program.

In addition, he said, he was unsure whether the school system would get $40 million in Medicaid money for next year's budget.

Budget committee member Ashish Sen agreed with Gillispie.

"We need to bank as much of it as we can. Next year, it's going to be rough," Sen said. "We have the opportunity to show prudence and that we can meet (the General Assembly) halfway. I think that's the sensible thing to do."

But most of the other committee members recommended using the money for programs that would directly help students and raise the level of education. Johnson and school board members said the surplus could be used to hire additional security officers, update the schools' computer network and provide more equipment and material for the science and math programs.

"There is nothing this school board could do to (appease) the legislature," school board President D. Sharon Grant said after the hearing. "I think we should put this money back in the hands of schools so they can implement plans that would impact our students."